Q3 2019 Earnings Call
At this time, all participants are in listen only mode.
Following the company's prepared remarks, we'll conduct a question answer session.
Instructions will be given at that time.
I would now let's turn the call whatsoever to our host Mr. Mark crap.
W X T is it director Investor Relations. Please go ahead.
Good morning, Thank you for joining be dividends teas third quarter 2019 earnings call. Joining me today, our Rex javelin President <unk>, Chief Executive Officer, David Black Senior Vice President and Chief Financial Officer.
On today's call, we will discuss certain matters that constitute forward looking statements and involve risks and uncertainties, including those described in the safe Harbor provision found in Yesterdays earnings release, and BW XT FCC violent.
We will also provide non-GAAP financial measures, which are reconciled to GAAP measures in the quarterly materials.
Copies of these materials documents, along with earnings presentation, and a replay of todays call are available on the Investor section of our website <unk>.
With that I will turn it over to <unk>.
Thank you Mark and good morning to everyone yesterday, we reported record third quarter results with non-GAAP earnings of 79 cents per share nearly doubled compared to the same period last year on robust revenue growth of 18.9%.
Revenue was up in all segments and consolidated operating margins expanded to 19.6% combined with a strong second quarter. These results lead us to increase 2019 earnings guidance to about 255 per share.
The quarter was highlighted by sustained growth in the Navy business. The nuclear operations group achieved record results driven by a sustained focus on execution and attention to detail even as we expand production capacity to meet shipbuilding needs. In addition, we recognize severable several favorable contract adjustments in the quarter most of which were.
Originally planned for Fourq, you and typically do not repeat on an annual basis few weeks ago, we announced that the nuclear operations group secured a multi year 806 million dollar contract for long lead material. This contract supports all the Navy's nuclear platforms and includes annual options that extend visibility into strategic nuclear.
Material purchases.
Into 2025.
Furthermore, we also recently reached an additional multi year pricing agreement of approximately $1 billion pending final government review, we anticipate assign contract to follow leading to production at 2020.
Binding the 2.1 billion dollar multi year pricing agreement, we announced in February with the aforementioned two agreements BW XT will have secured about 4 billion in incremental naval nuclear propulsion work and 2019, which is indicative of the growth ahead.
[noise] the nuclear operations group is maintaining a high capital expenditure rate as we continue to add production capacity at all of our U.S. plant in concert with that we continue to build the workforce and this segment of the business. Having recently added about 75 people, which brings the total employee head count to about 4300 for Enogen.
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Outside of nuclear propulsion the missile tube repair campaign is trending positively with about 60% of the missile two wells in repair or complete we still expect to wrap up the majority of the repairs by the end of the year and complete the remainder of the missile to backlog and 2021.
On the budget front, although we are currently operating under a continuing resolution BW XT has negotiated all major pricing agreement standing orders through 2020.
The Navy requested an incremental Virginia class submarine in the 2020 budget and appropriators continued to have discussions for funding support across the Navy's procurement plans.
The Navy is now planning to revise its four structure assessment by the ended the year. However, our long term guidance assumptions for the nuclear operations segment have not changed we continue to contemplate growth with the assumption of to Virginia class submarines per year afford class aircraft carrier every five years and the addition of the Columbia class over the.
The next decade.
And the nuclear power group Canadian refurbishment work has continued to provide a catalyst for growth.
I do want to provide an update on the recurring field service work that has trended down at 2019 due to seasonal outage cyclicality.
As we look ahead there are now fewer planned outages because reactors are being taken offline for scheduled refurbishments.
We previously expected 2020 recurring outages to rebound from sick bottom.
We now expect eight planned outages in 2020 and six in 2021. So while this doesn't result in a headwind we will not see a full rebound in that part of the business for some time until after the life extension projects are mostly complete.
However, the NPG segment is seeing good growth in the medical isotopes business.
Third quarter isotope revenues were up and as we said on the last call. We launched Indian 111, Oxy Quinlan in the third quarter and just last week, we publicly announced our production plans for germanium 68.
I want to underscore that while the market for indium 111, as modest compared to Molly 99. The steps we took to commercialize this generic radiopharmaceutical and navigate the FDA approval process is similar in nature to our commercialization efforts with in Mali 99 product line.
We continue to focus on industrialization of the Molly knocking on technology and the companion Technetium 99 generators at this point in time, we have every major system in construction or under contract.
We also initiated testing a multi target manufacturing and began preparations for a formal peer review of the BW X T. Chek 99 generator design. These efforts are reflected in the increased capital expenditures for the segment.
We also made a minor change to one of the milestones in our published schedule moving completion of facility modifications out a quarter due to an updated construction timelines. This is not a critical path items and it does not change the product introduction schedule. We continue to project commercial production in the first quarter of 2021.
And the nuclear services group as anticipated we are seeing second half strength.
Substantially more income that third quarter than the first half of the year.
And we continue to anticipate a strong close for the segment.
As we discussed on the last call some deal opportunities have been delayed. So let me give you a high level opportunity said, we are tracking over the next 24 months.
In the coming weeks, we expect to hear about the Hanford Central plateau cleanup contract for which we are competing the award for the Hanford tanks cleanup contract appears delayed until mid 2020.
Next year, we plan to compete for the Savannah River Oak Ridge in Idaho cleanup contracts, which are slated to be awarded in late 2020 on early 21.
We also anticipate the Savannah River management and operations contract will be up for re compete in late 2020 with awards likely in 2021 beyond that we will be looking for other deal. We opportunities that may include Idaho, Penntex and Y 12.
Let me now I'll turn the call over to David to discuss segment results guidance and other financial matters.
Thank you are correct, starting with segment results nuclear operations group delivered a record quarter with revenue up 23.5% or year over year to $394.5 million.
This robust growth was driven by higher production volume higher long lead material purchases and higher missile tube activity, partially offset by lower fuel downblending.
Operating income for the quarter was $93.7 million more than doubled the prior year period due to the absence of missile tube charges also higher volume and favorable contract adjustments, including nonrecurring adjustments to backlog contracts related to new agreements and future shop volume.
Yes.
The nuclear power group produced $84 million of revenue in the third quarter, a 6.6% increase when compared to the third quarter last year, driven by higher refurbishment component work and growth in medical radio isotopes, partially offset by lower volume and recurring field service activity.
Third quarter segment non-GAAP operating income was slightly up slightly versus the prior year period to $9.3 million.
Third quarter NPG non-GAAP operating margins were 11% lower than the first two quarters due to the completion of the China project as well as changes and estimated cost for another long term project.
And lastly, the nuclear services group contributor over operating income of $5.5 million in the third quarter down about $1 million versus the third quarter last year as improved operating performance was more than offset by contract completions in 2018.
Moving now to company results as Rex dimension third quarter non-GAAP EPS was an all time record at 79 cents up 98% from third quarter last year. The absence of missile tube charges higher segment volume solid operating margins lower share count and a better tax rate were part.
Really offset by higher interest expense and lower pension income.
The company third quarter capital expenditures were $47 million, bringing year to date capex to $123 million up over 100% versus a comparable prior year period. We also continued to return capital to shareholders in the third quarter through $16 million in dividend payments.
The board of Directors recently declared another cash dividend 17 cents per share payable in the fourth quarter of 2019.
The company generated $44 million of cash from operations in the third quarter of 2019 up significantly versus the prior year period. After deploying capital we had a September thirtyth ending balance of cash and short term investments net of restricted cash of $17 million.
Gross debt totaled $873 million at the end of the third quarter 2019, including $400 million in senior notes $273 million and term loans and $200 million and borrowings under the revolving credit facility.
We also had $64 million in letters of credit under the credit facility and as a result have $236 million of remaining availability.
Turning now to guidance as Rex mentioned, we have increased the 2019 guidance for non-GAAP earnings by five cents to about 255 per share on consolidated revenue growth of about 6% Dps guidance incorporates the robust operating performance to date and updates to non op.
Rating items, including other income and the non-GAAP effective tax rate.
We now expect other income primarily related to pension and other post employment benefits to be about $24 million for the year up $2 million from the prior guidance. We are lowering the guidance for the effective tax rate to about 23% for 2019 as we recognize the benefits from recent.
Tax planning initiatives.
We've also updated guidance for 2019 capital expenditures, which we now expect to be approximately $210 million. Most of the change was driven by timing, which has moved into 2020 and now makes the capital in 2020 about 240 million as this.
On the Alaska.
2020 was expected to be an elevated capital expenditure year similar to 19, but now it will be a peak year, we will still expect capital expenditures to remain elevated in the first half of 2021 and returned to maintenance levels toward the back half of that year overall.
2019, EPS guidance continues to contemplate tailwinds from higher volume robust operating margins reduced share count and lower taxes, while now expecting about 15 cents.
EPS headwind from increased interest in research and development expenses and lower non cat Fas pension income reported with other income.
All other components of 2019 guidance remain unchanged and lastly, we continue to reiterate long term non-GAAP EPS guidance of a low double digit EPS CAGR over the three to five year period from 2017 results.
I will turn the call back over to racks to discuss initial 2020 outlook and the progress we are making towards new opportunities and nuclear technology. Thank you David.
2020 is shaping up to be another strong year of growth for BW XT, we anticipate about 9% consolidated revenue growth driven by NRG and NPG, we expect earnings per share growth of about 7% from the elevated to 55 guidance for 2019, I would add that we expect modest margin pressure.
From some onetime adjustments in nuclear operations that were realized in Three Q2 019 that will not repeat next year and the completion of the China steam generator project and NPG, We will of course issue more formal guidance. When we report yearend results in February .
I will conclude with some comments about the emerging demand for BW XT advanced nuclear technologies that could lead to meaningful business growth in the coming years.
Last month, we announced that we would restart the existing try so nuclear fuel production line and expand capacity over the next year at an immaterial cost.
We are the only company to manufacture this type of fuel using production scale equipment and have been doing so for over a decade and a half to support experiments that the advanced test reactor at the Idaho National Laboratory. This is being done in preparation for nuclear demonstration project in the deal D D E and NASA, including micro reactors that could have multiple.
Future use cases try so fuel would be an essential element in success of developing such systems beyond try so I'm encouraged by the progress. The research team is making on other nuclear based technologies. For example, we have recently used to additive manufacturing technology to print uranium in complex geometrical forms of first.
In the industry. We are also utilizing artificial intelligence and novel ways to optimize reactor design, which we expect will lead to entirely new classes of safe high performance systems. All of these efforts align our capabilities with future government needs and position BW XT to enter these new markets with clear and competitively unique value propositions.
And with that I will ask the operator to open the lines for questions operator.
Ladies and gentlemen at this time will begin the question and answer session to ask your question. You May Press Star then one other touchtone phone. If you are using a speaker phone. We do ask you. Please pick up your handset before pressing the keys.
So it's all your questions you May press star into.
Once again that is star and then one to ask a question.
At this time, we'll pause momentarily to assemble the roster.
Our first question today comes from Bob Labick from C.J.S. Securities. Please go ahead with your question.
Good morning, Thanks for taking my questions.
Morning, Bob morning, Bob.
Let's start with the isotope timeline and as it relates the equipment installation into the reactor, which remains scheduled for Q1 of 2020 on your chart is this are you putting the equipment enduring.
Shut down or is this special event and it regulatory approval drags a little bit onto the schedule is there any risk to this timeline or do you have any contingencies for that.
Yes. Thank you for the question Bob we can do we can install the target delivery system.
Either through a planned outage or through a dedicated outage and we have those discussions ongoing with Ontario power generation, but we also recognizing the complexity and in commercial operations of nuclear reactor. We also have contingency plans and so we have other reactors available should we need that to get our production going so we're well prepared.
Or any changes in the outage schedule.
Okay Super and then just quick follow up as it relates to the timeline, obviously, a potential revenue 15 months or so away.
You remind us.
On the commercial arrangements.
I have or need to get.
Yes.
You will be selling to and what it what agreements you have in place for or anticipate please.
Yes, but we havent been explicit about any of that we.
As I have said on multiple occasions have a clear view about our channels to market, but we haven't disclosed anything specifically.
Got it understood. Okay. Thanks very much.
Thank you.
Our next question comes from Matt acres from Barclays. Please go ahead with your question.
Hey, good morning, guys. Thanks for the question.
Turning Matt you have talked about sort of the volatility in the back half for this year and we definitely saw that would have to be positive adjustment. This quarter's what's what's kind of the right way to think about that into 2020, I mean are there other sort of milestones coming up that could cause another kind of volatile quarter. Like we saw this time or does the thing sort of spread out from here.
Matt I would tend to think of 2020 as a bit smoother and the reason is we when we negotiate these.
Pricing agreements with our Navy client will end up with.
Backlog changes and therefore rate adjustments that can have.
Generally positive effects on on not only the backlog, but also in our financial results and so I don't.
Wouldn't anticipate is as much chunkiness into next year as this year.
Okay. Thanks, and then I guess just on the services side.
Some of the government services companies have talked about.
I guess the government has been a little bit more cautious around kind of budget uncertainty and maybe doing some some awards are you guys seeing any of that at all it doesn't sound like like Theres too much of that going on.
I don't think so in the deal we space if you look into the environmental management budget, it's steady.
And goes on and has very high visibility goes on for decades, and the same is true for the management and operations contracts that we see around the weapons complex and the other department of energy laboratories, it's very steady very well supported by not only the budgets President's budget request, but also by the Congress. So I think that looks very steady from our perspective.
Okay, great. Thanks.
Thank you.
Our next question comes from Robert.
Moving on from Credit Suisse. Please go ahead with your question.
Hi, Good morning, I wanted to start.
David with you and just go back to the to the Capex.
You were pretty clear a few minutes ago about at normalizing in the back half of 21.
Could you clarify the first half a 21 does does that first half trend at a similar percentage of sales that you saw this year unexpected 20 or is there some kind of a.
Have a ramp towards the back half of 21 should be on a percentage basis.
So what I would look at as you know as we talked about last quarter. It with our capital was about 25. This year. It was to 25 roughly the same next year and then it would stay at that elevated level in the first six months of 21, and then it would go down to 3% to 3.5% of revenue.
At the end of that year. So we've now said that this year is going to go down to 210, but that timing is going to move into next year.
So that changes from 225 to 10 takes it from 225 to 240 next year.
So then that elevated level.
The 100 and.
20, or so beginning of the.
Of the 21.
Second half will go down to once again, 303.5%.
Got it Okay, and then were acts on the on the isotopes you've mentioned the turn germanium 68 into some of the others.
How do we think about the relative sizes of these markets and then I think there was a comment earlier about the approval and ramp process being similar I think that was that comment was about the want 11, but are the incremental margins higher as you add products here because of what you've already done with Molly 99 or am I not understanding this.
Properly.
Yes, I think we've said in the past Rob that we expect gross margins to be 50, plus contribution margins, obviously higher than that so it's a business that has very good operating leverage to it.
We said and we said in last call that the germanium in India Maxing products would had something like 15, 20% marginal revenues in 20, as we got into full run rate, let's call that 2020.
At very good gross and incremental margins.
Bigger there relative markets.
In other words the opportunity long term, yes, those are those aren't very big markets you'd put them in this call it the $10 million to $20 million range something like that.
Okay, and then just one other thing is there a way to quantify the long lead boost.
Revenues in the quarter.
I mean, I think are you looking for the changes in the contracts or the what we're saying is the onetime or justice specifically to the long lead.
Anything that you would call out as beyond normal.
So so what I would do is I would.
No that we've always said that our margins are in the high teens and then you have a plus up there to get you into the very low twentys for the for the pension.
I would say that would be normalization. So if you take the margins we provided this quarter.
Three seven and take it to that normalization that that difference in margin is really what we've been talking about as those onetime adjust.
For the future.
Okay. All right. Thank you Dave Thanks for backup.
Thanks.
Our next question comes from Michael Somali from Suntrust. Please you how was your question.
Hey, good morning, guys. Thanks for taking my question.
Hey, good maybe Rex just on 2020, you talked about.
9% topline can you maybe parse that out for us a little bit you kind of gave some color on on the MPG side of the business with the outages. So that does MPG contribute growth next year with some of that outage headwind.
That's the isotope add to that growth rate, maybe if you could just give us some some growth by by segment or a little bit more color there.
Sure Good morning, Michael.
So the growth drivers are both NPG and NRG and I'd say, there approximately balanced and that growth.
With NPG itself, we will see higher volume higher sales from from the isotopes, we will see an upswing on outages, but probably not as sharp as we had anticipated.
Because of the cyclicality is interrupted by the refurbishment projects, but we're continuing to see good growth and the component work that we do in the and the Canadian market and spare parts work that we do in the Canadian market. So we remained quite bullish about that the refurbishment opportunities are significant and we're we're winning our share of the work so you'll see that business.
Growing it lets call it approximately the same rate as the Navy business next year.
Okay. Okay, and then just going back to the when you guys made the acquisition of GE Hitachi business are you guys realizing.
Those expected revenue synergies I know you talked about a doubling of the market. It sounds like you've got some of the cyclicality.
Nothing these outages, but are you guys getting the full benefits if that seemingly playing out as expected.
Yes, absolutely is.
If you look at where that business was in 2015 $120 million business will finish 363 70 next year and then the growth that we described front for for 2020, So think of it as a business that is on the verge of quadrupling on the topline bottomlines moving faster than that and some of that is attributable to the GE Hitachi acquisition. It just made us a.
A more robust player in that market and as we look at the pro Formas that we.
Developed at the time of that deal and looked at look at them in the rearview mirror.
That's that's been a very attractive acquisition for us and certainly strongly outperforming that pro formas at the time of the deal.
Got it and then just the last one I'll jump back in the Q.
On the try so fuel restart can you sort of quantify for us what what the potential revenue opportunity. It can be there. Obviously you do some of the Downblending now on an annual basis.
If some of these potential projects materialize, how should we think about that you know kind of layering in from a revenue perspective overtime.
Yes, maybe I'll characterize it in.
At a higher altitude Michael.
So the way we think about these new projects these space and defense reactors in the fuel and the related work around that.
Is we will as a company go and spend some R&D to develop a new capability.
The new technology for these kinds of markets.
And that comes from a higher R&D budget of course, and then would typically we'll get into some kind of a co funded R&D with with the deal we or the department of defense or NASA and we've seen that occurred in all three of those cases, and then normally what happens after that for these new markets four reactors and fuel is you'd see something like a demonstration mission.
A nuclear thermal propulsion for example, or the demonstration of a ground reactor and then of course, the endgame for all that is low rate production or or or high rate production for those kinds of reactors and so the way that I think about it is think of the R&D opportunities in the single digit Millen millions think of the demonstration program.
In terms as in tens of millions to hundreds depending on how complex and depending on where we are in the supply chain for that and fuel as a good fraction of that lets call. It 20, or 25% of those kind of numbers and so.
I mean, you can imagine fuel business that certainly generating tens of millions in the future depending on the demand.
Got it so were about four.
Or above that.
Good thanks, guys I'll jump back in Q.
Our next question comes from Pete Skibitski from Alembic Global. Please go ahead with your question.
Hey, good morning, guys nice quarter.
Yes.
Hey, racks to follow up on the on the whole small reactor fraud. It looked like certainly year to date Theres about a lot of momentum there even over the last quarter right. I think you were out there talking to a David bring just thinking about us and.
I've seen some are a finds out there from from duty organizations. So is that relative just becoming nearer term. My recollection is always that you kind of put out 2020 years and as being a potential year. This kind of breaks through do you feel the same way about timing there and any other color you could add to this interesting.
Appreciate it.
Yes, sure. Thank you and good morning.
Right I did speak at the National Space Council, which chaired by the Vice President and the NASS administrators, there the chairman of the joint Chiefs and others that have interest in space and so we have I think establish a national level dialogue for these micro reactors in there there are many applications, including nuclear thermal propulsion surface power directed energy.
Weapons off grid power for remote and forward basis. So I think there's a there's a great deal of interest from a variety of government agencies for these applications in terms of timing for that Pete.
If you look at the appropriations progress on the NASA bills Theres 125 million in House, Bill 100 million in the Senate Bill four nuclear thermal propulsion demonstration mission, certainly not all that would flow to the contractors, but.
We'd expect a piece of that should this appropriation.
Be done.
And then as you said, you've seen RF buys and activity across the Deo D. Strategic capabilities Office. For example is interested in a demonstration reactor we hear interest from the army and others and those kind of reactors and so yes, I think assuming that we can get through and all the sort of the political flux, it's occurring now at the national and we'll get through.
Relation cycle in some kind of normal way I do believe we'll start to see meaningful funding in 2020 in and beyond that.
That's great I appreciate the color.
Let me ask ominous see our it's almost seems like a game, but it's going to go into calendar 2020.
The 9% growth are you guys are giving your target for 2020 did how much would you know and extended CR or even a full year CR potentially impact that.
We're not terribly sensitive to it obviously it has nothing to do with our Canadian business than the things that are going on in our technical services business. I think we'll proceed to pace and then in the Navy business. All three of those are programs of record that will get funded at approximately normal levels Columbia afford in Virginia, So not.
All that sensitive to two whether whether we get into a year long CR.
Okay I appreciate it and last one for David David on the build in contracts on process through you know you kind of year to date.
I imagine that's new Keeler Navy related how are you thinking about the fourth quarter in terms of can that reverse and on a full year basis. Do you think you guys have a shot of getting to a one time conversion on free cash net income.
I mean, obviously, we're starting an increased amount of revenue.
Both that.
And our GE and NPG, so along with that Youre going to have additional working capital that's going to be built into the business, especially early parts of these contracts.
So what I mean, I think the working capital will continue to be.
Healthy.
But we know eventually in near term it'll come back, but right now it'll probably be strengthened.
Okay got it thanks guys.
Thanks, Pete Alright, operator, I believe that was our last call. Thank you everyone for joining us. This morning. This concludes our third quarter 2019 conference call. If you have further questions. Please call me at 19 0365 4300. Thank you.
Ladies and gentlemen that does conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.